State gets high marks for testing effectiveness of its business tax credits

Connecticut is one of 13 states “leading the way” when it comes to tracking and testing the effectiveness of its tax credits and other economic development incentives, according to a new report from a leading national public policy think-tank.

But the state’s top economic development official said Tuesday that while she’s pleased by the findings of the Washington, D.C.-based Pew Center on the States, Connecticut is taking steps to elevate its tax analysis to new levels, pursuing even greater economic gains for every dollar spent.

“We were thrilled to see that we got high marks,” Department of Economic and Community Development Commissioner Catherine H. Smith said, referring to a report that also gave 12 states mixed grades while concluding 25 others and the District of Columbia are “trailing behind” when it comes to effectively investing public dollars in the economy.

“In their quest to strengthen their economies, particularly in the wake of the Great Recession, states continue to rely heavily on tax incentives, including credits, exemptions, and deductions, to encourage businesses to locate, hire, expand, and invest within their borders,” the report states. “Yet half the states have not taken basic steps to produce and connect policy makers with good evidence of whether these tools deliver a strong return on taxpayer dollars.”

States spend billions annually through tax breaks and other incentives for economic development.

Connecticut offers nearly $3.6 billion worth of exemptions in its sales tax alone, many of which are aimed at assisting businesses more than consumers. It also has nearly $300 million in credits, exemptions and other breaks in its corporate income tax system.

Every state offers at least one tax incentive and these have grown substantially since the 1970s.

“Frequently they are used as part of a bidding war between states over firms seeking to relocate or expand,” the report adds. “If one state offers a tax credit, others often feel compelled to match it or risk being left behind.”

But states generally have failed to “regularly and rigorously” test whether those investments have been effective, The Pew Center wrote. Further complicating matters, “states that have conducted rigorous evaluations of some incentives virtually ignore others or assess them infrequently. Other states regularly examine these investments, but not thoroughly enough.”

Despite this long history of failing to scrutinize public investments in business, some states have begun offering “a wealth of promising approaches” toward reversing that trend.

Connecticut drew high marks largely for a 2010 study of its job creation tax credits, a report that not only recognized those credits that benefited the state, but also those that failed to meet state goals.

“This analysis allows policy makers to identify whether programs are growing or shrinking, and whether they are becoming more or less effective over time,” the Pew Center wrote.

For example, while examining a tax credit designed to increase business research and development, the state noted that while it led some companies to buy more specialized, durable equipment, many companies were buying that equipment out of state.

Smith said Tuesday that the administration already is working to update that 2010 study to reflect 2011 changes, both in tax policy and business development.

More importantly, the commissioner added, Gov. Dannel P. Malloy launched a task force earlier this year that will help address “the one little black eye” the Pew Center report found with Connecticut’s business tax policy under the prior administration.

While the Pew Center ranked Connecticut as a national leader overall, it did give the state a mixed grade in one area: finding a way to ensure its legislators and other policy-makers use tax policy analyses once they’ve been prepared.

“The one problem with that (2010) report was nobody in the last administration formulated a response based on that analysis,” Smith said. “Nobody picked up the ball and said here are six things we can do.”

“The report recognizes that Connecticut has become a leader in evaluating the effectiveness of its tax credits in creating jobs, but Connecticut and all states have a long way to go,” said Wade Gibson, senior policy fellow at Connecticut Voices for Children. “The next step is to translate these findings into policy change by focusing the state’s efforts on incentives that are effective in creating jobs and dropping tax subsidies that don’t work.”

Connecticut Voices has been one of the most vocal advocates for more effective analysis of the state’s tax incentives for economic development.

“It’s good to know that Connecticut is doing its due diligence when it comes to spending the taxpayers’ money,” said Sen. Stephen T. Cassano, D-Manchester, a member of the Finance, Revenue and Bonding Committee. “I’m definitely in favor of getting the most bang for our buck when it comes to tax incentives for job creation. This type of business encouragement is very prevalent around the country today because of the state of our national economy, and the Connecticut legislature seems to have made some very wise investments along these lines.”

Other states’ programs

The Pew Center report identified several tools other states have employed to force policy-makers to look at these tax policy report cards.

In Oregon, a 2009 law sets most tax credits to expire after six years, forcing legislators to reassess them periodically if they want effective programs to continue.

In Washington state, nonpartisan state analysts work with a citizen commission and make recommendations presented to the legislature at public hearings.

Several states have begun to regularly reassess film tax credit programs — an incentive that became particularly popular over the past decade — after some glaring examples of states’ gaining little, or even losing funds, as a result of loopholes.

Wisconsin’s Commerce Department was critical of that state’s program in 2009 after noting that its film tax credit was based on a movie’s total spending, not just the money spent in Wisconsin.

It noted that 73 percent of the spending on “Public Enemies,” a movie staring Johnny Depp, went out of state as most workers on that film weren’t Wisconsin residents. The state reimbursed the film company $4.6 million even though the film generated just $5 million in spending in the state.

After that report, Wisconsin capped its maximum film credit at $500,000.

According to the Pew Center, 37 states provided $1.3 billion in film tax credits in 2011, up dramatically from four states and $3 million in tax credits in 2000.